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May Movement: Stocks Gain as States Cautiously Reopen

By Kara Murphy

“We choose to go to the moon in this decade and do the other things, not because they are easy, but because they are hard.”

— President John F. Kennedy, 1962

Key Takeaways

  • The stock market climbed higher for a second straight month, buoyed by signs of progress in the fight against the coronavirus pandemic, the race to find a vaccine and the lifting of containment measures in all 50 U.S. states.
  • High-yield and municipal bonds staged a comeback as the broader fixed-income market treaded water.
  • Millions more Americans filed for unemployment, but certain real-time economic indicators show that the U.S. economy may be emerging from its coronavirus-induced deep freeze.

In late May, in our third month of being at home, my family and I watched the first crew launch into space from U.S. soil since 2011. That very day, protests for racial equality were held in cities throughout the country. It was a striking juxtaposition of the heights that we can achieve and the challenges we still face. Both historic moments struck me as a metaphor for pushing ahead even when things are hard, a sentiment echoed in President Kennedy's famous quote about the quest to put a man on the moon.

Even as these events were unfolding, the U.S. took its first steps toward getting back to business in the usual sense, another sign of progress amid lingering challenges and uncertainty. All 50 states took steps to reopen their economies last month, a development that helped propel the stock market higher for a second-straight month.

Equity Markets

By the end of May, the broad U.S. stock market, as measured by the S&P 500 index, had recouped a significant portion of the losses it suffered earlier in the year and stood firmly in positive territory for the trailing, 12-month period.

Last month’s rally wasn’t confined to the large companies that make up the S&P 500. The Russell 2000 index of small-company stocks outperformed the broader market, although it remained in negative territory for the year-to-date and trailing, 12-month periods through May. Small-company stocks tend to be more sensitive to changes in domestic economic activity than their large-company peers.

Why did stocks continue to shrug off reports of staggering job losses and other negative economic data?

As perplexing as this disconnect may seem, keep in mind that the stock market is a leading indicator and, as such, it reflects where investors, on the whole, think the economy is headed, rather than where it’s been or even current conditions. During the financial crisis, the S&P 500 hit bottom in March 2009, months before the U.S. economy began to grow again.

The market’s sunnier outlook over the last couple months has a lot to do with the federal government’s response to the coronavirus-induced downturn. Between Congress and the Federal Reserve, the federal government has committed more than $4 trillion to support the economy and financial markets. Lately, we’ve begun to see tentative signs that the government’s unprecedented fiscal and monetary actions are translating into a pickup in economic activity. (More on this below.)

In May, we also saw signs that our collective efforts to fight the coronavirus pandemic are yielding results. Although the U.S. death toll passed 100,00 in late May, COVID-19 infection rates in a number of states, including some of the hardest-hit, flattened or began to trend downward, prompting authorities to unveil plans for loosening restrictions on movement and business activity. States also began putting new safeguards in place, including expanded COVID-19 testing and contact tracing.

A number of European countries are also loosening containment measures, although their focus is largely on reopening schools and small stores and resuming outdoor activities. Most U.S. states have concentrated on reopening nonessential retail shops and lifting bans on dine-in business at restaurants. These moves, along with hopeful news about potential coronavirus vaccines, helped lift stocks higher last month.

U.S. Sectors

All 11 S&P 500 sectors saw positive returns in May, led by key secular growth sectors such as Technology (up 7.1%), Materials (7.0%) and Industrials (5.5%).

Technology was one of the growth leaders in May and has been the best-performing sector for the year and the trailing twelve months. The sector was a strong performer during the bull market, held up relatively well during the selloff in March and was a bright spot in both April and May. Some of the well-known, large technology companies have been by stay-at-home orders and other pandemic-related issues than their peers in hospitality, retail and certain other industries. And they’re widely expected to emerge from this downturn stronger thanks to rising demand for cloud computing, video conferencing, online shopping and other services.

Fixed Income

The broad bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Index, treaded water last month, as it did in April. That said, the market returned slightly more than 5% and about 9% for the year-to-date and trailing, 12-month periods, respectively, through May. A couple more bond-related highlights from last month:

  • The high-yield corporate-bond sector, which suffered a steep decline in March, produced a second straight strong month, returning more than 4% in May. High-yield corporate bonds (also known as junk bonds) offer a higher rate of interest than investment-grade corporate bonds or government debt to compensate investors for their higher risk of default. As economic activity has declined, many investors have grown concerned about the prospect of large scale corporate defaults, but those worries eased last month, sparking renewed interest in high-yield bonds.
  • The municipal-bond sector, which also had negative returns in March and April, staged a comeback last month. With unemployment rising and retail sales declining, many cities and states have seen tax revenues fall, raising concerns among investors about the prospect of municipal-bond defaults. Media reports of a possible impending wave of municipal bankruptcies have only exacerbated those concerns.

In my view, however, the risk profile of the municipal-bond market isn’t likely to deteriorate much in the near term. While tax revenues have slipped, cities and states tend to rely fairly heavily on federal aid. In fact, federal aid to states now accounts for about 32% of total revenues, up from 19% a decade ago, according to a report released in early May by the Goldman Sachs Private Wealth Management Investment Strategy Group (ISG). What’s more, Congress recently allocated $150 billion in direct aid to state and local governments, and it may provide even more support in a possible fourth stimulus package. In addition, the Federal Reserve has taken steps to support liquidity in the municipal-bond market. Watch this short video to learn more about the implications of the coronavirus crisis for the sector.

The Economy and the Fed

If the U.S. economy had a theme song right now, it might be Elton John’s “I’m Still Standing.”

The pandemic has no doubt inflicted deep economic pain at home and abroad, and we saw more evidence of that last month. During the eleven week period from March 13 to May 30, a staggering 42.6 million workers filed for unemployment benefits, according to the Labor Department. In April, the unemployment rate rose to a post-World War II high of 14.7%. Goldman Sachs Global Investment Research (GIR) expects unemployment to peak at 25%, before declining to 12% by the end of this year.

That said, the unemployment rate and many other widely followed economic metrics are lagging indicators, meaning they reflect what’s already happened. When taking the pulse of the economy, it’s also helpful to look at so-called high-frequency indicators, which reflect real-time conditions. In doing so, we saw evidence last month that the economy may be emerging from its coronavirus-induced deep freeze, thanks in part to emergency rate cuts and other Fed actions intended to lessen the pandemic’s economic blow:

  • According to an ISG report, retail spending on Bank of America (BAC) credit and debit cards (excluding automobile sales) between May 12-16 was unchanged from the same period in 2019. Total spending on BAC cards declined 12% during the last five days of May on a year-over-year basis. That represented an improvement from the 36% decline on BAC cards during the same period in March.
  • In late May, Americans were moving around much more freely than they had been in April, as measured by Apple Inc. mobility data, which reflects requests for Apple Maps directions, according to the ISG report.
  • The ISG report also noted that residential mortgage applications were approaching pre-pandemic February levels after declining 35% in March and April on a year-over-year basis.

The American economy is by no means out of the woods yet. GIR expects U.S. economic growth to shrink by 33% in the second quarter on an annualized basis, followed by a recovery in the third quarter and beyond. For full-year 2020, GIR expects growth to contract by 4.2%, according to the most recent publication from ISG dated June 21. It expects global growth to decline by nearly 4% this year, on a year-over-year basis.

Despite the stock market’s recent rally, many investors remain pessimistic about the near-term outlook, as evidenced by the record amount of cash, nearly $5 trillion, parked in money market funds last month. Money market accounts are considered a safe haven for investors seeking to preserve capital.

Amid heightened uncertainty, we can expect to see more market volatility in the coming weeks and months. The Chicago Board Options Exchange Volatility Index (VIX), a measure of expected market volatility, stood at about 28 in late May, substantially below its March high of 83, but still above its long-term average of 19.

Among the issues we’ll be watching closely is how consumers respond to the easing of containment measures: Will they return in greater numbers to stores and restaurants? Or will lingering health-related fears and shaken economic confidence rule the day?

We’ll also be keeping a close eye on COVID-19 infection and hospitalization rates at home and abroad. As more Americans venture out, these rates are bound to rise. The pivotal question is: By how much?


As I watched last month’s space launch alongside the growing protests, there was a part of me that couldn’t help but be hopeful – that together we can achieve amazing heights, and together we can advocate for a better world. In more ways than one, sometimes it helps to take the long view when times are tough. As we know from past experience, progress — whether in investing or in life — isn’t always linear.

Of course, there’s no need to go it alone during this difficult period. If you have questions about the markets or your financial plan, reach out to your financial advisor. That’s what they’re there for. As I’ve pointed out to my children, even an astronaut needs a wingman.

Invest well and stay healthy,

Kara Murphy, CFA

Chief Investment Officer

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Index Definitions

S&P 500 Index: A broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalization.

Russell 2000 Index: This index measures the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks; the index serves as a benchmark for small-cap U.S. stocks.

MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.

MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009, the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

Bloomberg Barclays U.S. Aggregate Bond Index: This is a market capitalization weighted bond index of investment-grade, USD-denominated fixed-income securities.

U.S. High Yield Corporate: The Bloomberg Barclays U.S. Corporate High Yield Bond Index measures the USD-denominated, high-yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.

U.S. Investment Grade Corporate: The Bloomberg Barclays U.S. Corporate Bond Index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes USD-denominated securities publicly issued by U.S. and non-U.S. industrial, utility, and financial issuers.

Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated, long-term, tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

S&P 500 GICS Sectors Level-1: In 1999, MSCI and S&P Global developed the Global Industry Classification Standard (GICS) to offer an efficient investment tool to capture the breadth, depth, and evolution of industry sectors. GICS is a four-tiered, hierarchical industry classification system. It consists of 11 sectors, 24 industry groups, 68 industries, and 157 sub-industries. Companies are classified quantitatively and qualitatively. Each company is assigned a single GICS classification at the sub-industry level according to its principal business activity. MSCI and S&P Global use revenues as a key factor in determining a firm’s principal business activity. Earnings and market perception, however, are also recognized as important and relevant information for classification purposes and are considered during the annual review process.

Kara Murphy

Kara Murphy

United Capital Financial Advisers, LLC d/b/a Goldman Sachs Personal Financial Management (“GS PFM”) is a registered investment adviser and an affiliate of Goldman Sachs & Co. LLC and subsidiary of The Goldman Sachs Group, Inc., a worldwide, full-service investment banking, broker-dealer, asset management, and financial services organization.

The information contained herein is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered investment advice. GS PFM does not provide legal, tax, or accounting advice. Clients should obtain their own independent legal, tax, or accounting advice based on their particular circumstances. Please contact your financial adviser with questions about your specific needs and circumstances.

Information and opinions expressed by individuals other than GS PFM employees do not necessarily reflect the view of GS PFM. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.

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